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Thursday, 11 August 2011

Vital to balance taxpayers’ rights against fiscal laws

In June the Minister of Finance tabled the Tax Administration Bill in Parliament, first mooted in 2005 with the stated purpose of containing the administrative provisions affecting all taxes other than Customs and excise duties.

The bill consists of 20 chapters with 272 draft sections relating to various processes taxpayers will face when dealing with SARS.

SARS has indicated that the tabling of the legislation is the first step in rewriting the Income tax Act, Act 58 of 1962.

Once the bill has been enacted those administrative provisions currently contained in the act and other fiscal statutes will be repealed.

The bill creates a legal framework for the creation of a tax ombud in SA. Under the bill the minister must appoint a tax ombud for a period of three years. SARS has indicated that the tax ombud will follow the model used by the UK in creating the tax adjudicator’s office and the tax ombud’s office in Canada. The bill provides that the staff of the office of the tax ombud must be employed in terms of the SARS Act and will be seconded to the office of the tax ombud from SARS.

The mandate of the tax ombud, according to the legislation, is to review and address complaints by a taxpayer regarding a service or a procedural administrative matter. The tax ombud is required to review a complaint lodged by a taxpayer and resolve it, either through mediation or conciliation, and must act independently in resolving taxpayers’ complaints. The tax ombud is required to follow informal, fair and cost-effective procedures in resolving taxpayers’ complaints.

It's vital to balance taxpayers' rights against fiscal laws as the bill gives SARS the power to conduct a search and seizure operation without a warrant to protect documents from destruction.

The tax ombud may review any issue falling within its jurisdiction on receipt of a request from a taxpayer. The tax ombud may determine how a review is to be conducted and may decide that a review should be terminated before completion in certain cases.

Some commentators have raised concerns about the fact that the tax ombud will be housed within SARS and will not be created as a separate and distinct office outside SARS.

Practically, the tax ombud is required to obtain access to taxpayer information and can only do so where the ombud is regulated by the secrecy provisions contained in the fiscal statutes. The housing of the tax ombud within a tax authority is not that unusual when reference is made to the models used as a basis to create a tax ombud in SA, and is also the manner in which the taxpayer advocate’s office was created in the US, which seeks to deal with taxpayer complaints lodged against the Internal Revenue Service.

The Tax Administration Bill also seeks to ensure that taxpayers’ rights are protected where a taxpayer faces a criminal investigation. The bill requires that audits and criminal investigations are separated, ensuring that the rights of an accused under the constitution are protected.

The one power contained in the bill that has attracted comment is SARS’s power to conduct a search and seizure operation without a warrant to protect documents from destruction by taxpayers.

Currently under the act SARS may only search taxpayers’ premises and seize documents when authorised to do so by a warrant issued by a court in terms of section 74D of the act. Clause 63 of the Tax Administration Bill confers on a senior SARS official the power to search premises and seize documents without a warrant when that senior official, on reasonable grounds, is satisfied that there may be an imminent removal or destruction of records likely to be found on the premises and that the delay in securing a search and seizure warrant would defeat the object of the search and seizure.

Clearly, the power to conduct a search and seizure operation without a warrant is not aimed at those taxpayers who comply with the fiscal laws of the country but is aimed at those who choose to operate outside the law.

A concern that arises, though, is the possibility of the power contained in clause 63 of the bill being abused by senior SARS officials, particularly as there is no oversight by a third independent party as to when it is appropriate to search premises and seize documents.

It would be preferable if SARS exercised the power it seeks such that the court, after the search and seizure operation, reviewed the decision made by an official to conduct a warrantless search and seizure operation.

The difficulty that arises is that a search and seizure operation conducted without a warrant constitutes an invasion of the rights of a taxpayer to privacy under the constitution. On the other hand, SARS has a statutory duty to ensure that taxpayers comply with the fiscal laws and faces taxpayers who, once an audit commences, seek to destroy documents.

It is, therefore, necessary to strike a balance between the rights of the taxpayers on the one hand and the statutory duty which SARS has of ensuring that taxpayers comply with the fiscal laws.

It would appear that the decision which may be made by a senior SARS official to conduct a warrantless search and seizure operation constitutes administrative action as envisaged under the rules of administrative law.

That being the case, it is important that any official making a decision under clause 63 of the bill does not have a pecuniary interest in the outcome of the decision made by that official based on the general principles of administrative law in SA.

It is unclear whether SARS officials receive incentives or bonuses directly relating to the tax that they collect. Should an official have a pecuniary interest in the outcome of the decision, that would be indicative of the official being biased.

SARS should, therefore, clarify whether its officials are in receipt of incentives directly related to the taxes collected by them and, if that is the case, it raises a question as to whether clause 63 is constitutionally valid.

It remains questionable whether clause 63 complies with the constitution, particularly when reference is made to the strict rules in place in so far as issuing search and seizure warrants under the Criminal Procedure Act are concerned and, particularly, in the light of the decision of the Constitutional Court in Minister for Safety and Security v GW van der Merwe and Others, where the Constitutional Court held that the provisions of the North-West Gambling Act No 2 of 2001 authorising an inspector to enter unlicensed gambling premises without a warrant , were unconstitutional and invalid.

It is important that taxpayers note that many of the administrative provisions currently contained in the act and other fiscal statutes will continue to exist in the Tax Administration Bill.

It is unclear at this stage when the bill will be enacted and when it will take effect. It is more than likely that the provisions of the bill will become effective on different dates and taxpayers will need to take account of the provisions so that they understand the powers that SARS has under the legislation and the rights which are contained therein.

·Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law & Tax Review August 2011. Image free from ClipArt